Budget 2015: The Next Generation Lost Out to the Next Election

Last Tuesday’s Budget was politically cute but economically foolish, and felt very like Fianna Fail budgets of old. It might be the last one before the next General Election, so Fine Gael and Labour could be forgiven for a little self-interest. But not for being quite so politically motivated, and quite so irresponsible.

Just six months ago, the Government plan was to introduce deficit-reducing measures totalling €2bn. Instead, it introduced deficit increasing measures of €1bn. The economy’s doing better than expected, so there’s a case for easing off on the full €2bn. But reversing engines by a whopping €3bn has a strong whiff of bubble-era budgeting.

As did Fianna Fail, Fine Gael and Labour are propping up ongoing spending with one-off revenues. Eight hundred million euros of additional expenditure savings has been abandoned, and is being paid for by an unexpected €1.1bn jump in ‘non-tax revenue’ – things like Central Bank surpluses and cash from the sale of State assets.

There are also two importance differences to Fianna Fail economics. First, the pre-election giveaways during the bubble were funded from budget surpluses. Fine Gael and Labour have just done it with borrowed money. Second, during the bubble there was strong economic growth around the world. Compare that to events this week – stock market dips and several countries, including Germany, revising growth forecasts downwards. The Government’s €3bn budget turnaround is predicated on ambitious growth and revenue forecasts. Hopefully these will hold true, but they mightn’t.

After the crash, a safeguard against this cycle of election budgeting was put in place across the eurozone. Every country had to establish an independent, expert group to advise on fiscal policy. Ours is called the Irish Fiscal Advisory Council (IFAC) and right up to Budget day, IFAC was strongly advising the Government to implement the full €2bn in deficit-reduction measures. The Government not only ignored IFAC, it went in exactly the opposite direction. Why? To buy votes.

This is exactly the sort of short-term, irresponsible politics that got us into trouble in the first place. The Irish people have worked incredibly hard, and have put up with a hell of a lot, to get the nation’s finances on to a stable footing again – that should not be put at risk.

On the taxation side, the Government has done some things well. The R&D tax credit and the new ‘Knowledge Box’ should support knowledge-intensive enterprise in Ireland. There are 11 measures aimed at supporting farmers that are minor and blatantly politically motivated, but seem sensible nonetheless.

The two big changes in taxation – water charges and income tax – have, however, been done badly. They won’t affect the deficit, as the money raised from water will more or less cover the money lost from lower income taxes. But they will affect the distribution of taxation, with those earning above the average paying less and those earning below the average paying more. It’ll work roughly like this: People earning above €45k a year will be slightly better off. For example, someone earning €100k will pay €747 less in tax, pay about €300 for water, and so will be up €447 overall. People earning below about €35k will be worse off. For example, someone earning €25k will pay €174 less in tax, but will also pay about €300 for water, and so will be down €126 overall.

Because it’s a zero-sum game, every euro someone earning above €45k gains will come from a euro someone earning below €35k loses. For the examples above, the money taken from four people earning €25k will be combined and given to one person earning €100k.

The last three previous budgets have taken most from those who had the least to give. But in Budget 2015, Fine Gael and Labour are actually taking money from people on the minimum wage and giving it to people earning €150k . . . like Government ministers, for example. This is bad social policy, it’s bad economic policy, and it’s just plain wrong.

On the spending side too, we see signs of old habits re-emerging. Of the €2bn deficit-reduction measures proposed in April, €1.4bn was meant to come from reduced expenditure. Instead, spending is going up by €1.4bn. Some of this is welcome, such as the investment in social housing. But there’s a real fear that the opportunity to make big, important changes in public service delivery has been abandoned.

Healthcare’s a good example. This year, the healthcare budget will over-run by about €500m, which could be addressed for 2015 in two different ways – find €500m in unnecessary spending, or increase the budget by €500m. Even though we’ll still borrow more than €5bn next year, the Government has decided to spend.

It shouldn’t have. Ireland has the highest level of public health expenditure in the developed world, as a percentage of GDP or GNP, once you adjust for the younger age of our population. Healthcare in Ireland isn’t underfunded, it’s badly designed and it’s badly run. The different pieces of the system don’t talk to each other. Frontline workers are asked to treat patients in often impossible conditions. The management culture within the HSE means they’re viewed as the enemy by many clinicians, leading to missed opportunities every day.

In Ireland we spend nearly twice as much per person on pharmaceuticals as they do in England. Why? Because they insist on generics where available, and aggressively negotiate down the prices, using their considerable purchasing power. We do not. If we moved to England’s level of spend, it would save us €1.1bn every year.

In Budget 2015, the Government failed, again, to invest in the single most important public service for the future – education. The increase in education spending is just €46m, or half of one per cent. At less than inflation, it represents a cut in real terms. Imagine what €1.1bn saved on drug spending could do here. We could reduce classroom sizes in every classroom, in every primary school, by 20pc. And in every secondary school. And increase funding to higher education by 50pc. And still have over €100m left over for things such as training, research and technology.

As with healthcare, there are plenty of ways to improve our education system that don’t require money, but just imagine what that level of investment would do for educational standards.

Budget 2015 is not all bad. But overall, it has moved us backwards rather than forwards. It needed to invest in the next decade and the next generation. Instead, it has invested in the next election. Fine Gael and Labour are worried by the polls and desperately want to be back in Government next time round. So they’re doing what they’ve seen work time and time again – they’re pulling a Fianna Fail. It may work. But it may not – we’ve been through a lot as a nation these past few years. We’ve a pretty good idea what short-termist, old-fashioned, irresponsible politics can lead to, and we may decide we’ve had enough of it.

 This article originally appeared in the Sunday Independent on October 19th 2014